Significant supply expansion for office, retail, hospitality and resi; Policies, Tech adaptation, Sustainability to define 2022 RE – JLL PH
JLL Philippines covered notable trends in 2021, shared their forward views on the real estate landscape in 2022, and gave prominence to sectors that will define the real estate landscape in 2022
Office market performance stabilizing
The office market performance is stabilizing but may experience subdued leasing activity in the first half of the year.
“For the office market, we’re seeing signs of market stability,” says Janlo de los Reyes, JLL Philippines Head of Research and Consultancy. “For Q4 2021, what we saw was a moderate take-up of 75,713 sqm in gross leasing volumes.” While the number is lower than previous quarters, de los Reyes said that there is still improved sentiment in the market, citing compliance concerns, rightsizing, and halt in vacancy uptick as key factors for the Q4 figures.
“In terms of elections, we see that leasing activities may slow down in the first half of 2022 as more investors and occupiers postpone their leasing decisions as they wait and see where policies might change,” says de los Reyes.
The IT-BPM industry remains a key driver of the market (62.5% take-up of 2021 vs. corporate occupiers with 36.6% take up), specifically those that cater to the healthcare, financial services, and e-commerce, and engineering domains. These domains drive both expansion and renewals from the previous quarter.
Office move-outs and rightsizing also slowed down in Q4 2021, and occupiers have settled their short-term position and hit pause on long-term commitments. de los Reyes added that companies are still evaluating what the future office spaces would look like. “One thing is certain here: There’s more acceptance of a hybrid work model across occupiers-meaning they’re open to having a percentage of their workforce work remotely,” says de los Reyes.
The halt in vacancy uptick is also a key factor for subdued leasing activity. In previous quarters of 2021, there was an increase in vacancy levels, owing to the pull-out and move out of IT-BPM and POGOs in Q2 and Q3. The vacancy uptick, however, has come to a standstill from 18.04% in Q3 to 17.97% in Q4 2021.
de los Reyes says that the rental market is firming up, with the gap between headline and transacted rents narrowing from 19.9% in Q3 to 4.0% in Q4. “We’re also seeing fewer concessions from landlords, which may be an indication of optimism across stakeholders. We may see that narrowing gap moving forward, but with the Omicron hitting us in Q1 2022, we’re expecting this gap to widen again in the first half of 2022.”
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Sustained positive performance in retail
The retail sector is expected to sustain positive performance carrying over from Q3 2021. There is a sustained easing of vacancy levels across Metro Manila due to retail store openings taking advantage of the holiday season.
“Store openings have outpaced closures, with a huge chunk of that coming from IKEA opening around 65,000 sqm of retail space.” de los Reyes says there are still some store closures, “around 10,000 sqm, but more than half of that are relocations and renovations as retailers refresh their stores and prepare for expansion.”
Expansions currently drive store openings, and the top retail categories driving store expansions are food and beverage (26.6%), followed by home appliances and furniture (21.5%). Other retail categories driving expansions include beauty and wellness (13.9%), clothing and apparel (10.1%), sports and fitness (5.1%) with both foreign and local brands expanding their presence in Metro Manila.
Rentals are declining which has helped prop up mall occupancy. “Flexible lease terms are continuing, with mall operators continuing to provide discounts in rentals for occupiers,” days de los Reyes.
E-commerce is also seen to be a key driver in retail. Charlie McNaught, JLL APAC Director for Logistics and Industrial, cites a McKinsey report stating: “The APAC e-commerce logistics market will account for 57% of total market growth in the next five years. To supplement this, he notes that for every $1billion spent on e-commerce, approximately 1.25million sq ft. is required in the supply chain.”
When asked about where best to invest in logistics facilities were, P. Ryan Isip, JLL Philippines’ Head of Capital Markets said that they would typically look at would be the fringe areas on the northern and southern parts of Metro Manila. “Having sites in the southern and the northern parts of Metro Manila should be considered. The importance of road network infrastructure is very important, which is why Bulacan and Clark in the north, as well as Laguna in the south are the ideal distribution areas.
Continued mixed performance in residential
There is significant easing of vacancy rate in residential condominiums (from 6.8 % to 5.1%) which is due to relaxed restrictions and higher return to office in Q4. “Return to office has led to the increase in demand from professionals working in the business hubs, who may have reactivated their leases or are looking for accommodation near their workplace,” says de los Reyes.
In terms of vacancy levels, the midscale segment improved (with rent inching up to PHP 770 per sqm) while upscale and luxury registered higher vacancy (with rent around PHP 1,029 sqm).
Overall prices register mixed performance, with increasing prices for ready-for-occupancy (RFO) properties in the midscale and luxury segments, decreasing price for pre-selling midscale, and an increase for pre-selling luxury.
Holiday season prop up hospitality performance
“The holiday season drove up hotel occupancy to 87.9% in Q4 2021 due to lower COVID-19 cases, relaxed restrictions, and pent-up leisure demand,” says de los Reyes. This is the highest rate of hotel occupancy during the pandemic.
In terms of facility types, quarantine facilities continue to lead the way at 92.8%, followed by multi-use hotels (servicing quarantine and non-quarantine guests) at 85.6%, and leisure hotels at 79.4%.
There is also a significant increase of operating facilities in the mid-scale segment as multiple hotels took advantage of the holiday season and the demand of staycations.
Overall room rates continue to increase, with Q4 2021 showing a 6.0% growth q-on-q. Higher room rates are also seen across segments (midscale, upper, and luxury), except for the economy segment, which has a competitive market in terms of demands for discounts in room rates.
Interest in logistics remains strong
Interest in the logistics sector remains strong. McNaught identified five key trends in the logistics and industrial sector: e-commerce, cold storage, ESG, urban logistics, and multi-storey facilities.
Cold chain and cold storage are also expected to have a rise in demand even post-pandemic. “Vaccines are a topical subject to the moment, but this also includes goods that require temperature control such as groceries like fruits and vegetables, meat and dairy, or miscellaneous products like wine and tobacco,” says McNaught.
McNaught also zooms in on urban logistics and the increasing prevalence of multi-storey logistics in APAC, which is common in many APAC markets like Japan and Korea but emerging in new markets where availability of development land is scarce.
“Despite land costs, the benefits of a being in a good urban logistics location can far outweigh the added real estate expense, assuming it puts the company in closer proximity to the end consumers. The cherry on top is faster delivery times and lower transportation costs,” says McNaught.
Data center players gear up for hyperscalers
“The data center market in the Philippines is still at its early stages,” says Carl Dizon, Senior Analyst of JLL Philippines’ Capital Markets. “Currently the market is dominated by our local telecommunication providers.”
While data centers in the Philippines started with telcos needing data for their own operations, the exponential advancement in internet technologies resulted in data center demand from hyperscalers – companies that process huge amounts of data they use in their day-to-day operations.
“Data localization is requiring data collected from a population to be physically stored within the borders of the country. As it stands, majority of the Filipinos’ data are stored in data centers overseas,” says Dizon. Hyperscalers and foreign data center operators are expecting data localization policies as this is a growing trend across Southeast Asia.
Key predictions for the sector in 2022 include building data centers beyond Metro Manila, an increase in internet services, and more joint ventures between local developers and foreign operators.
Near-term headwinds, Long-term tailwinds: Key themes to shape the real estate market
The political environment in 2022 is expected to affect activities in the real estate market, but likewise provides legs for future growth.
The PEZA moratorium remains a key factor in lease activity, as compliance influences decisions by IT-BPM occupiers. “In the third quarter of last year, we saw pick-up in terms inquiries by a lot of the IT-BPM companies as they are waiting on the PEZA moratorium decisions, whether that would be lifted or extended to the following year.” “And with that being deferred to March 2022, we see leasing activity go down. We still see some expansion in the fourth quarter and these are the resilient industries that we have talked about from the previous quarters.”
The Retail Trade Localization Act is also projected to impact real estate activity. “In the long term, we expect growth in retailer demand, with the Philippines becoming a hotbed for retail destination. There are requirements removed in the revision, which will hopefully attract more capital for perspective retailers,” says de los Reyes.
JLL also forecasts the Regional Comprehensive Economic Partnership (RCEP) and the amendments to the Public Services Act to provide structural changes in the market, as these are expected to attract foreign investments.
There is also a rising prominence of technology in the built-up environment due to continuous shifts in demand. “Sustainability and safety and wellness are also accelerating technology adoption across occupiers,” says de los Reyes. JLL cites contactless systems, access cards, automated censors, and aircon filters as examples of adopted PropTech.
Environmental, Social, and Governance (ESG) investments are also essential to success. Nix Garchitorena, JLL Philippines’ Energy & Sustainability Services Manager, emphasizes the importance of a continued push for actionable steps in achieving sustainability goals. According to Garchitorena, out of the top 50+ clients globally, 96% have set ambitious, publicly-stated sustainability goals, and 88% of them have set those goals but will expire by 2025. Only 19% have a clear, real estate-specific sustainability action plan, and the goal in 2022 is to narrow the gap between publicly-stated sustainability goals and specific action plans.
Demand for green certifications is also on the rise, with both new and old offices making efforts to meet this demand. There’s also a push from the regulation side which Garchitorena sited, “Back in 2019, the SEC has released a memo stating that all Publicly Listed Companies are required to produce an annual sustainability report”.
Green Certified Buildings: JLL assisted properties in acquiring green certifications (L-R: Neo Developments, Arthaland Century Pacific Tower, and NEX Tower)
Calum Swinnerton, JLL Philippines’ Head of Project Development and Services, presented asset enhancement as a solution for occupiers to meet the demand for updated buildings. “Over 50% of buildings in major cities are over 20 years old and most have not be,n upgraded to meet post Covid requirements. As vacancy rates increase and rental rates decline, a ‘do nothing’ approach will not preserve or enhance value,” says Swinnerton.Swinnerton identifies health and wellness, human experience, sustainability, and technology as areas whose enhancement focuses changed since COVID-19 began.
Key takeaway: Cautious Optimism
The Philippines’s real estate market is expected to move with cautious optimism in 2022 following the performance in leasing activities in 2021. Market sentiment is improving, but mixed outlook remains.
“We also expect new supply or significant supply expansion in 2022 on office, retail, hospitality and residential to exert pressure in terms of real estate market performance,” says de los Reyes.
JLL has been operating in the Philippines since 1997 as a 100% wholly owned entity and currently manages about 4.4 million square meters of real estate with a workforce of over 1,100 employees. With more than two decades of local expertise working hand-in-hand with its global legacy, JLL provides to the Philippine real estate market an unparalleled synergy of services with a strong commitment to achieve real estate ambitions through future-ready approaches. For further information, visit http://www.jll.com.ph/.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $16.6 billion in 2020, operations in over 80 countries and a global workforce of more than 95,000 as of September 30, 2021. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.